More Banks in Arkansas Form Captive Insurance Companies and look to Arkansas as the Preferred Domicile
by Josh Miller, CEO, KeyState Captive Management & Zach Stedman, Member, Mitchell, Williams, Selig, Gates Woodyard PLLC
The Growth of Bank Captives companies” said CEO of Indiana Bankers Identifying and Addressing Your Association, Amber VanTil. “We have been There is no avoiding it. Cyber security and Bank’s Unfunded Risks discussing bank captives with other state reputation protection are among today’s It is important to recognize that the captive banking associations throughout the significant, emerging risks, thus creating structure does not typically replace a bank’s country and there’s been tremendous exposures for banks of all sizes. At the same primary commercial insurance program. interest.” time, commercial insurance carriers are However, it does allow a bank to more pushing banks to higher deductibles, so “Arkansas banks are increasingly looking to formally self-insure risks that are currently there remain significant gaps in coverage captive insurance companies as a tool for unfunded or that the bank has considered and exclusions in commercial insurance identifying and funding for risks that are retaining (i.e., increased deductible layers). policies. This creates unfunded risks, which not covered by their commercial insurance Typically, the captive augments commercial must be evaluated as a part of any bank’s program,” notes Lorrie Trogden, CEO of policies in the following ways: enterprise risk management process. the Arkansas Bankers Association. “We are Covers the bank’s commercial deduct- also very pleased that Arkansas Insurance To address the concerns, banks throughout ible layers, including specific deduct- Department Commissioner Allen Kerr has the country are forming captive insurance ibles for more catastrophic losses like developed a robust and business friendly companies to cover these unfunded risks. A windstorm and hail damage approach to regulating captives. It allows captive is a legally licensed, limited purpose, Arkansas banks to keep their captives in- Provides “difference in conditions” cov- property and casualty insurance company, state rather than looking to other popular erage for existing commercial policies which can write customized policies for domiciles like Vermont, Delaware or Nevada.” like cyber risk, which primarily relate to related entities. sublimits and exclusions on the com- Commissioner Allen Kerr of the Arkansas While larger institutions (typically mercial policy form Insurance Department was asked about $10bn in assets and larger) with specific the Insurance Department’s commitment Increases coverage levels on existing organizational structures (i.e., holding to growing captive insurance in Arkansas. policies (excess layers) companies with numerous charters and Commissioner Kerr stated, “We have made subsidiaries) have been utilizing these types Identifies other currently unfunded captive insurance a priority in Arkansas of captives since 2006, captives did were not risks to insure where commercial in- through changing our laws to become an option for mid-size community banks surance is not available to the bank more business friendly and traveling around ($1bn - $10bn) until an updated structure like reputation risk the country to show business leaders how was designed and vetted with regulators in locating their captive business in our state Federal and State Statutes and 2012. makes good financial sense. We are working Regulatory Framework “Since late 2012, we have seen the number on returning Arkansas companies’ captive Along with benefits received from of banks with captives explode. The majority business back home while showing outside enhancing a bank’s risk management of our banks that are good candidates for businesses that Arkansas is a Natural State process, Congress approved a small business owning a captive either have one in place for captive business opportunities.” incentive for mid-size companies that form or are in process of putting one in place. their own insurance companies to insure Over 85% of Indiana banks with over $1bn these currently unfunded risks. Through in assets have formed captive insurance
36 The Arkansas Banker n Fall 2019 the incentive, banks can form their own “dormant status.” The dormant status captive insurance companies and then make establishes a solution for a captive insurance an election under Section 831(b) of the company that has ceased insurance Arkansas Based Internal Revenue Code. This “small captive” operations but does not want to relinquish Family Owned provision allows companies to pre-fund for its license should it determine that it wants potential future risks on a tax advantaged to resume operations in the future. In basis, provide an incentive to set money 2019, the Arkansas legislature continued CREDIT LIFE aside for future potential claims and create a to improve the captive laws, decreasing & DISABILITY mechanism for companies to formalize their the capital and surplus requirements for INSURANCE current self-insurance program. sponsored captives and adding greater flexibility for mergers. Recent legislation demonstrated Congress’ renewed intent to support mid-size Forming a captive insurance company is businesses utilizing captive insurance not a good fit for every financial institution. companies to create a contingency plan In most cases, the Federal Reserve has Live Life. for unfunded risks. In the December 2015 determined that this solution can only be Appropriation Bill, Congress increased the implemented by institutions that are well Leave a Legacy. annual allowable premium limit for small managed and well capitalized. Holding captives from $1.2 million to $2.3 million companies that want to form a captive in 2019 (which now adjusts annually with should typically have over $1bn in assets. CPI). This increase in the allowable premium There are exceptions but institutions of this limit has spurred additional interest for size normally have a risk profile that justifies larger institutions that have more significant the formation of captive and the associated unfunded risk. They can increase their operating expenses. captive insurance coverage as they grow. The potential savings related to this small business subsidy (Section 831b) for Josh Miller, CEO of KeyState captives varies from bank to bank, but Captive Management, launched the they can be significant. In some cases, Bank Captive Program in 2012. He holding companies can see an increase to has worked with over 100 financial consolidated earnings per share of 1-3% institutions across the country that prior to adjusting for claims made to the have formed captive insurance captive. Of course, a bank does not expect companies. 28 state banking a significant claim each year. The captive is associations, including the Arkansas Bankers Association, have designed to cover risks that typically have endorsed KeyState’s Bank Captive Program for their members. high potential loss severity but low likely Banks with an interest in exploring whether a captive insurance frequency. The captive becomes a way to company is a good fit for their institution should contact Josh put reserves away, literally for a rainy day. Miller at [email protected]. Arkansas continues to update its captive framework to respond to businesses investigating the benefits of owning a Zach Steadman, Member, captive insurance company. For instance, in Mitchell, Williams, Selig, Gates 2017, Arkansas updated its laws addressing Woodyard PLLC, has been instrumental the formation and operation of captive in the development and ongoing insurance companies, adding provisions revisions to Arkansas law addressing Donna Spakes for formation of “incorporated protected captive insurance companies and has [email protected] cells” and broadening the organizational been in the formation of the majority requirements to include limited liability of the captive insurance companies in Arkansas. Contact Zach 501.519.0555 | 800.446.2214 companies. Additionally, the 2017 law Stedman at [email protected] to discuss whether flicar.com created a mechanism for captives to enter forming a captive is a good strategy for your institution.
Fall 2019 n The Arkansas Banker 37